Gold’s not the only safe-haven commodity

Silver, corn, coffee and gasoline prices have been climbing too

SAN FRANCISCO (MarketWatch) — Gold has climbed by a phenomenal $339 an ounce since the start of July, proving its worth as a safe-haven investment, but the yellow metal isn’t the only commodity that can offer a refuge for investors.

“After all, no matter what happens to paper markets, physical commodities will still be in demand,” said Jason Schenker, president and chief economist at Prestige Economics LLC.

Gold prices
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are up 28% year to date. Other commodities have seen impressive gains as well, despite the bloodbath in the U.S. equities markets and often grim news on the global economy.

“Industrial metals, precious metals, and energy commodities are all real assets that are consumed,” said Schenker. “They are also much more homogeneous and fungible than other specific investments of a given financial asset class. As such, they are all a bit safer in the long run.”

Over the past 12 months, the Thomson Reuters/Jefferies CRB Index (CRY), which tracks 19 commodities representing all commodity sectors, has climbed more than 20%. The Dow Jones Industrial Average
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is up just 5.5% for the same period.

The “safe” commodities are those with consistent demand such as food, those with inelastic supply that can’t easily expand to meet rising demand, including coffee and cocoa, and metals with restricted supply locations such as platinum and palladium, said Christopher Ecclestone, a strategist at Hallgarten & Company LLC.

“The most dangerous commodities are those that have run up on purely financial factors,” he said, adding that gold and silver have led that pack. “Any removal of liquidity can cause a slump.”

In a class by itself

The implication that gold and silver may be “dangerous” commodities would certainly be hard for some investors to swallow. The words “safe haven” in the commodities world has been synonymous with gold — and silver too. Read about central banks’ recent gold purchases.

“Safe haven, to me, means that [the investment] will hold up if the economy tanks,” said Chris Mayer, editor of Capital & Crisis. “I can’t say that is true for any other commodity.”

“Nothing rivals gold’s safe-haven appeal at the moment,” said Evan Smith, co-manager of the U.S. Global Investors Global Resources Fund
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“Gold’s drivers are financial not industrial use, so it is going to be insulated from fluctuations or downgrades in growth,” while the bulk of copper and oil usage is industrial so those commodities are “much more susceptible to swings in economic growth.”

And with economic growth seeing a slowdown around the globe, investors in economically linked commodities do have a lot to worry about.

It’s “no surprise that China is a huge buyer of these — on the order of 35%-50% of world consumption depending on the commodity,” he said. “China is slowing down too so it makes sense that these commodities would be hard hit.”

Reuters

Year to date, copper futures have lost 11% on the Comex division of the New York Mercantile Exchange. On the London Metal Exchange, lead and nickel trade a bit higher than they did a year ago, while nickel’s slightly lower, according to data from the exchange’s website.

Gold, on the other hand, “thrives in a weak economic environment since, under this scenario, all countries look to devalue, but gold does not devalue as its supply is not controlled by any central bank,” said Sam Kirtley, chief executive officer of SK Options Trading.

Meanwhile, “silver behaves like a hybrid between gold and an industrial metal,” he said. “It’s increasing monetary value has so far offset much of the negative drag from decreasing industrial demand” and prices are likely to challenge $50 again in 2011. Read more about silver, gold’s worthy rival.

Cutting risk

Of course, in an environment where 400-point drops in the Dow have become the norm, maybe nothing’s really “safe” — just “safer” than other investment bets.

Ecclestone said he’d feel safest in food commodities, followed by base metals such as lead and zinc, and specialty metals, then precious metals and least of all in “fad” metals like rare earths.

Grains such as corn and wheat won’t be affected by a slowdown in gross domestic product, but “investors can still get hurt if they make the wrong short-term bets,” said U.S. Global Investors’s Smith.

“The long-term supply/demand fundamentals for grains are quite strong,” he said, pointing out that consumption of grains has historically risen with GDP per capita and higher incomes, and grain inventories have been at record lows because much of the world is suffering through floods or drought.

Corn futures trade 13% higher year to date, including a 7% jump month to date. Wheat lags, down 11% for the year so far, but up 6% month to date.

Reuters

Agricultural commodities are largely perishable, said James Dailey, portfolio manager of Team Asset Strategy Fund
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but “they may be the most leveraged to investor flows to commodities as an ‘asset class’ at the index level.”

Oil’s moves on the Nymex, meanwhile, have been less than impressive, hammered by dismal prospects for demand. West Texas Intermediate crude
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is down 10% year to date but on the ICE, Brent crude, Europe’s benchmark, has gained 13% for the year so far.

“The market is embracing the Brent crude oil as a safe haven, when the vast trading community whimsically switches to fear of inflation, as opposed to the deflational fears that gripped bipolar traders in August,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.

The WTI contract is more of a “sideshow,” he said, “and could remain a sideshow until pipelines of scale are constructed so that land-locked domestic crude can be transported to the world market.”

Cautious traders

Some analysts are wary of assumptions that the need for certain commodities make them safer bets — and rightly so.

“People still need to eat, use metals and burn fuel no matter how bad the economy gets,” said SK Options Trading’s Kirtley. But “this should be of little concern to investors.”

“What should be of concern is the price of these commodities, and those where demand is cyclical in nature are likely to fall in price with a recession,” he said.

So what’s the best approach for an investor looking to reduce risks?

The “dynamics of every crisis are different, so what investors really need to do ... is to track all commodities and then pick out the ones that are in an uptrend,” said Matthew Tuttle, chief executive officer at Tuttle Wealth Management in Stamford, Conn., noting that for now, gold and silver remain the obvious commodity safe havens.

Investors also need to be clear on exactly what they are seeking in a safe haven.

“If one is looking for low volatility and stability, then no commodities are prudent due to the inherent volatility,” said Team Asset Strategy Fund’s Dailey. “If one is looking for preservation of long-term purchasing power, than many commodities have served that monetary function in various cultures throughout history, with gold the most prominent.”

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